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A Case Study of Currency Crisis

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Submitted By luyanbin1990
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A Case Study of Currency Crisis: The Russian Default of 1998

Background of Russia
Russian Federation was formed in 1991. The country tried to maintain a fixed exchange rate however, Russia had a “fragile fiscal position”(Economic Report) which turned unstable as the world markets changed. Up until 1997 Russia had slow but eventually a year of positive economic growth, at which point the country started to stumble. Russia launched a reform program in 1992. At the time of 1992, the monetary inherited from Soviet times resulted in an increase over 350 percentage of price level in a month. Rumbles was introduced in July 1992, inflation became the central concern in the relief. With limited foreign reserves, Russia joined the IMF and World Bank on June 1, 1992 and agreed several economic transition programs that would bring fund of billions of US dollars. After 4 years of economic stabilization and control of inflation rate, Russia’s inflation fell from 197% in 1995 to 47.7% in 1996 and 14% in 1997. In 1993, a short debt term instrument, Government Short Commitments (GKO), was introduced. It provided the government with an extra, non inflationary to finance its budget deficit. Russia’s fiscal deficit fell significantly, from 11% of GDP in 1994 to less than 5% of GDP in 1995. CBR’s foreign reserves increased from 4 billion US dollars in 1994 to 14.4 billion US dollars in 1995. However, one third of ruble short-term debt was held by foreign investors. Direct foreign investments were remaining low. Russia’s tax system is poorly designed. Tax laws were complicated and the enforcement was ineffective. The accounting system is not based on the true performance of the firms. The majority of the tax revenues were shared between regional and federal governments. Regional governments tend to help the firms conceal part their taxable profit. In return, firms would…...

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